The Financial Industry Regulatory Authority has filed a complaint against Chicago-based Jordan P. Zaro, the owner and chief executive of Riverside Securities Inc., for swindling money from a 63-year old widow and creating false account statements showing fake municipal bond purchases to cover up the scheme.
Zaro excessively traded, or "churned," the widow's account, generating losses, and then created false account statements showing muni bond and money market fund purchases with profits instead of the actual losses, according to the complaint, which was filed in March by FINRA's enforcement department with the office of hearing officers but not released until Friday. In reality, Zaro purchased mostly equities, which were unsuitable for the widow's financial situation and needs, the FINRA lawyers said. The widow was not named and was only referred to as CJF in the complaint.
Zaro violated the Municipal Securities Rulemaking Board's Rule G-17 on fair dealing as well as other rules, according to the FINRA lawyers, who asked that he be forced to disgorge all ill-gotten gains and provide full restitution, with interest, to the widow.
According to FINRA, Zaro purchased the Riverside firm in April 1991 and was its president, chief financial officer and chief compliance officer.
In June 2004, CJF transferred her account from another brokerage firm to Riverside after her husband died. At the time of the transfer, the account had a balance of about $1.3 million, with a margin balance of $531,000, for a net account equity value of $841,100. Riverside acted as an "introducing broker" but its customers' accounts, including the widow's account, were carried by a clearing broker.
Between July 2004 and November 2005, Zaro engaged in excessive and unsuitable trading in CJF's account and the value of the account plummeted to $250,528, while Zaro reaped $433,000 in commissions from the trading.
According to FINRA, Zaro bought $28 million of securities for the account. But the account had an annualized turnover rate of about 28, an annualized cost-to-equity ratio of about 46%, and an annualized commission-to-equity ratio of about 43%. In other words, the FINRA lawyers said, the account would have had to achieve a return of about 46% per annum to break even.
In April 2007, Zaro created a false account statement for March showing the account was carried by Riverside instead of the clearing broker and showing the five muni bond purchases and a "tax-free money market" with a total value of $743,874. In reality, according to the clearing broker, CJF owned none of those securities and the value of her holdings was only $404,261.
Zaro created another false account statement for April showing the value of CJF's holdings as $751,631, when the clearing broker showed her account was valued at only $391,373.
A review of Zaro's broker-dealer record at FINRA shows a series of customer complaints against him for alleged unsuitable and unauthorized trading at different firms. Three of the complaints occurred from 1979 through 1983 and one in 2008, for which an arbitration is still pending. Zaro was discharged from Oppenheimer & Co. in 1983 over a customer complaint that he engaged in unauthorized transactions.
Neither Zaro nor anyone at Riverside Securities could be reached for comment.